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00836 CHINA RES POWER
RTNominal up18.260 +0.380 (+2.125%)
Research Report

30/09/2019 17:43

New tariff mechanism hurts profits of China power producers

[ET Net News Agency, 30 September 2019] Chinese power generating companies (gencos)
could see profit margins decline as China prepares to abolish benchmark tariff prices for
coal-generated electricity from 1 January 2020, S&P Global Ratings said.
However, the agency doesn't expect an immediate rating impact because most rated gencos
are backed by central or local governments.
The Chinese government announced on 26 September 2019 that benchmark coal-power on-grid
tariffs will be replaced by a base tariff plus a floating adjustment mechanism. S&P thinks
this base tariff is an interim mechanism aimed at accelerating the transition to
market-based power generation in China after decades of benchmarks.
The next direction on tariffs will be downward, given falling coal prices. Indeed, in
announcing the new tariff mechanism, Chinese officials indicated there will be no upward
adjustment in 2020 (even if coal costs rebound) and tariffs for general commercial and
industrials should move downward only.
Hence, any windfall profits for coal-powered gencos from declining coal prices and
value-added tax cuts so far this year may be foregone and passed to the real economy.
S&P believes the market, rather than the government, will decide the degree of downward
adjustments under the new mechanism. Any downward adjustments will likely be largely, but
not overly, reflective of declining coal costs. Because of this, China's gencos will
likely see declining profitability of degree over the next 12-18 months. (KL)

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